Q1 2020 Earnings Call

Good day, ladies and gentlemen, and welcome to your Eastern Company first quarter Twentytwenty earnings call.

Lines have been placed on the listen only mode and the full will be open for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time, but it's my pleasure to turn the floor over to your host Chris molten head of corporate development, Sir the floor is yours.

Thank you hi, good morning, and thank you everyone for joining us today.

Speaking today will be Easter is president and CEO guts watching as well as our CFO John seldom after that we'll open the call for questions. Please note that some of the information you'll hear during our discussion today will consist of forward looking statements about the company's future financial performance in business prospects, including without limitation statements regarding revenue gross margin.

Operating expenses other income expense taxes and business outlook. These forward looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in each forward looking statements. These risks include but are not limited to the effects of the cobot 19 pandemic and the measures being taken to speed.

To limit the spread of could be 19.

For more information regarding these risks and uncertainties. Please refer to risk factors discussed in our form 10-Q filed yesterday.

In addition, during today's call will discuss non-GAAP financial measures that we believe are useful as supplemental measures Easterns performance. These non-GAAP measures should be considered in addition to not as a substitute for or in isolation from GAAP results with that I'll turn the call over to guests for opening remarks.

[music], Thanks, Chris and good morning to those of you have joined US on the phone and also those participating via the web.

We released eastern first quarter results last Wednesday, and the full form 10-Q yesterday afternoon.

I would like to start by taking a moment to thank our employees around the world for their sacrifices.

Hard work.

[noise] openness to embrace new ways of working during its very difficult time.

And I'd also like to acknowledge the exemplary efforts of our health care professionals and workers on the front line.

We are very appreciative of their commitment to keep us all healthy unsafe.

[music] I want to highlight.

The efforts of our team at Big three precision who partnered with try anda to manufacture thousands of frames for emergency and disaster relief beds under an incredibly tight time frame.

These best had been used across the country, including in the field Hospital into Boston Convention Center.

[music] in addition.

I want to tell you about our UK based subsidiary for its efforts in designing and manufacturing molds for Cobot 19 test tubes that are going to be part of cobot Nike testing kits.

As difficult as this time has been.

The way in which our leadership and our teams across our company have stepped up is really impressive and deserves to be recognized.

[music] that brings me to where things stand today.

And the financial impact at the measures to respond to hit our hobby.

I could continue to have on our company.

In late January when news of Cobot 19 in China began to surface.

And when we were trying to starting to see the impact across our operations in China.

We spoke with you.

ER and mentioned that we had already implemented a series of mitigation steps there.

To reduce the risk to our China employees.

Unfortunately, covert 19 would soon spread rapidly across the world requiring all of us to react extremely quickly.

Across our businesses, we have since been implemented a broad range of policies and procedures to ensure that employees at all of our locations remains six.

We listen to and be learned a great deal from our colleagues in China.

And took necessary action early on across our North American operations.

[music]. These include implementing social distancing measures.

Staggering style.

And shifts.

Enabling work from home for as many employees as possible.

Implementing enhance bleeding programs across all of our sites.

And strongly advising our employee.

Personal hygiene and the importance of worrying face masks to reduce the spread of covert Nike.

In some locations, we've even rented private buses, which enable us.

To ensure that our employees have access to clean safe transportation to win from work.

All of our businesses are learning sharing and working together.

To protect everyone who shows up to work.

[music] as governments continue to offer guidance to commercial operations, we will continue to ensure compliance with these directors.

In order to maintain business continuity for our operations.

Importantly, the majority of our businesses are deemed essential.

And accordingly have remained open, albeit at reduced levels.

Beginning the last week of April many of our customers, who had closed had begun to open up.

And by the Middle of this month, we expect that the vast majority of our customers who had previously closed well have resumed operations at some level.

Importantly, until now disruption in our supply chain has been minimal.

And we're continuously working with our suppliers to make sure that we are ready to meet our customers' needs.

[music], it's worth adding that while some of our customers close plant.

And stop manufacturing products.

The engineering departments continue to work on new products and our engineers have kept pace to support with this new product development.

Which will help us launch new products later on in the year.

Now turning to the financial highlights for the quarter.

Net sales for the first quarter increased by 7%.

65.3 million.

From 60.9 million into first quarter of 2019, driven primarily by the addition of big three precision, which we acquired in August of 29 tea.

This was our third acquisition in this meeting as many years.

Net income for the first quarter increased to 2.9 million or 46 cents per diluted share and that's from 1.6 million were 25 cents per diluted share for the first quarter of 29 King.

I'll now turn the call over to John to go over the details of our financial results.

Thank you got.

Remember my remarks, this morning, I'm going to focus on he says results for the first quarter of 2020 as compared to the first quarter of 29 team.

Well the first quarter 2020, net sales increased 7%.

65.3 million from 60.9 million in the first quarter 2019.

Sales growth was largely attributable to the inclusion of victory precision.

Sale of existing products increased in the first quarter by 5% well NIM.

Price and do or price increases a new products contributed 2%.

New products include.

Hey, handle and finger pull assembly, an emergency door latch amount play Blatche are talking about power luck module across bad luck assembly and various industrial castings, serving the water and gas industry.

Sales increase in the industrial hardware segment by 23% to 47.2 million into first quarter 2020.

From 38.4 million to first quarter 2019.

Excluding big three precision sales decreased 11% in the industrial hardware segment first quarter compared to the first quarter up 2090.

Increased sales in the specialty vehicle off highway and military markets or not sufficient to offset declines in distribution.

I say truck recreational vehicle and aftermarket replacement parts, especially during the last half of March when certain customers closed their operations due to actions they had taken to help stopped spread of coded Nike.

[noise] sales into security products segment decreased 16% in the first quarter 2020, [laughter] compared to the first quarter 2019, due to lower demand across the majority of the markets we serve including.

Distribution industrial vehicular accessories and commercial launch.

As well as lots of supply contracts with Medtronic, Adblock systems, and RV door matches, which generated sales in the first quarter 2019 that did not reoccur in 2020.

Sales in the metal products segment decreased 27% in the first quarter compared to first quarter 2019.

From a money products decreased 21% and sale of industry and casting products decreased 35% in the first quarter compared to the first quarter 2019.

Mining sales in the first quarter impacted by a combination of growing renewable energy capacity extremely low natural gas prices and a moot unusually warm weather in the first quarter, which led to utilities to cut back on coal usage.

Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporary source products from costs due to what fire at their facility in 2018, which I temporarily shut down production or products that would otherwise have been sourced internally.

In addition sales were negatively impacted due to the completion of contracts from a cost or customer serving the transit industry.

Cost of products sold into first quarter increased 3.6 million or 8% compared to the first quarter 2019.

Primarily as a result of the inclusion of victory precision.

Excluding bicsthree precision custom products sold would have decreased by 14%.

<unk>, reflecting the reduced sales levels.

Gross margin as a percent of sale was 22% in the first quarter compared to 23% first quarter 2019.

Product development expenses decreased 1.5 million or 65% in the first quarter compared to the first quarter 2019. The reduction in this expense relates to the closure of the build back road I keep development operation in Bellingham, Washington, which took place in the second quarter 29 team.

Strategic decision made to adopt a leaner approach the development of new vision products.

Selling and administrative expenses increased 1.6 million or 19% the first quarter compared to the first quarter 2019, primarily as a result or the inclusion of victory precision.

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Excluded a big excluding three precision selling administrative expenses in the first quarter 2020 would have decreased by <unk> point Fivemillion were 6% from the first quarter 2090.

The most significant factor contributing to this reduction was a decrease in payroll and payroll related expenses <unk> point 3 million.

For a quick.

View of the balance sheet and cash flows.

Cash generated by operating activities was 1.5 million during the first quarter of 2020 in line with approximately 1.5 million generated during the first quarter 2019.

Capital expenditures was approximately point 8 billion for the first quarter 2020, compared to point 7 million for the first quarter 2019.

As of March 28, 2020, there was approximately point 1 million about standing capital commitments for the remainder of 2020.

Well I know the current uncertainties, we made the strategic decision to limit capital expenditures. So those critical for maintenance safety regulatory suppressive projects with immediate return on investment for fiscal 2020.

As compared to the point or the 4 million that we had previously communicated on our Q4 fiscal year 2019 earnings call.

As of March 28, 2020, we had total cash cash equivalents of approximately 16.5 billion and total debt of approximately 97.5 billion.

And we were in compliance with our bank covenants.

I'll turn the call over to Chris' question.

Thanks, John operator, I'd like to open the call up for questions.

While we wait for a Q, we do have questions that are coming via the webcast and let's start with them and I'll return back to you.

Telephone calls.

First question on many of your customers currently still closed.

Well.

Some of our customers in both the automotive and a non automotive industries initiated varying degrees of shutdowns really starting in the.

Last week of of March of this year.

And these temporary shutdowns, obviously had an adverse impact on our demand for our products.

But we believe and we're seeing that our customers are opening a back in at the majority of those customers will have reopened by the end of this week.

And the remaining are due to open in the.

Next week, the following week to week after that.

Okay, and operator, I'm, sorry, I believe you're providing instructions for a telephone collars.

If you like you are.

Finished nothing.

Thank you before it will be open for questions. After we've answered the web question. If you do have a question you May press star one on your telephone keypad at this time to be entered into the queue. If you're using a speaker phone. We asked well posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment over the phone you May press star one on your.

A telephone keypad at this time.

Okay, Great. We do have some more at questions via the webcast what was the impact of Cobot 19 on the company's performance in Q1.

Yes.

Basically we were affected mm three ways cobot 19.

First affected our operations in Shanghai and Dongguan China.

We source about 15% of our products from China and do the government. The closures we were unable to manufacture in should some of those products to us.

One thing was in the last half of March some of our customers became oppose manufacturing operations.

Due to trying to contain the spread of Cobot 19, then finally.

We believe that most of our companies are essential businesses, but we did have to shut down.

One of our facilities in the first quarter because of a single case of cold that 19.

All of this weird estimate that the adverse financial impact.

Due to this virus on our first quarter operating profit profits to be approximately $600000 net of tax.

Okay.

And then we haven't third question via the webcast for the company have sufficient catch you get through this pandemic.

Well, we from multiple scenarios, including some pretty dire outlooks for the year, which which we don't anticipate based on information that we have available today, but which we do want to be prepare for in any case.

And based on this analysis, we believe that cash.

Cash flow from operations and funds available under our revolving credit portion of our credit agreement.

Will be sufficient to cover our foreseeable cash requirements.

However, I know that and I think you understand a based on the current macroeconomic conditions, Andy uncertainty surrounding covert 19.

We can't offer any assurances.

Okay.

And then we've got another question <unk> level of debt reduction in 2019.

John do you have that on hand.

He will basically we have paid down.

Big portion of our debt on an accelerated payment but.

When we made the big three acquisition.

We had to increase the debt more did a financing so we ended up with a $100 million.

Which included about 18 million from the previous.

Loans that we had.

Yeah.

And then we do have one other question via the webcast.

Yeah, we don't provide guidance, but maybe.

Got you can provide some a little more color.

Even with the difficulties around the world and we still expect a record year in revenues and earnings for 2020.

Well at a time when every company that has experience offering guidances withdrawn their guidance because of the uncertainty surrounding the economic environment.

I think it's hard for us to predict whether this year will be a record year for 2020.

I do think that we are well positioned to.

Navigate the current environment that our businesses are well positioned to continue to devote be successful through this period.

And.

Make the investments necessary.

Positioned the business well enough to thrive over the medium to long term.

Okay great.

Operator, do we have any colors via the told them one.

As a reminder, ladies and gentlemen, if you'd like to ask a question over the phone. Please press star one on your telephone keypad at this time.

It appears there are no questions over the phone.

Okay.

Yes.

Thank you.

A quick what Bob we're focused on navigating the impact of the measures to mitigate the spread of covert 19.

We remain very confident in our strategy to deliver significant long term shareholder value.

We continue to work on optimizing our portfolio businesses, which includes.

Working with our most recent acquisition Big Dthree.

Precision to position it for a long term growth.

And optimize its performance.

We're maximizing the results from each of our businesses, especially now into current environment.

Where we're carefully managing our business is cash generation.

And of course, we remain very focused on maintaining the strength of our balance sheet.

Both to ensure short term strength.

As well as to position us for future growth.

Importantly across our businesses our backlog has remained robust at the end of the first quarter.

Our businesses are resilient and we believe they can execute as soon as economic activity rebounds.

I would like to emphasize that we're very confident that the actions that we have taken to manage our businesses. During this difficult period.

Have positioned to them well to withstand and even more prolonged economic downturn should one transpire.

As always please reach out to us and I discuss any questions that you may have.

Thank you.

Thanks, Scott a with that ill hand, the call back the operator.

Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.

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